Auto Sales Growth – Demand Headwinds to Persist For Now; Recovery in 2HFY20

01 July 2019

Registrations for 2-wheelers (2W) and medium & heavy commercial vehicles (MHCV) fell 9% and 10% YoY (year-on-year) respectively in May19, continuing the downward trend for auto sales growth, which is seen as a key indicator for domestic consumption. OEMs also scaled back production, as demand for both new and replacement parts have declined. Citi analysts breakdown the key issues plaguing the auto industry:

Domestic Demand

Domestic demand, particularly rural demand has been hit by low agri-income, compounded by adverse weather conditions, inefficient transmission of MSP hikes and tight liquidity conditions. Additionally, a slowdown in industrial activity has affected both new truck sales and tyre/parts replacement sales owing to lower wear and tear.

Regulatory Issues

The increase in allowable axle load for trucks directly contributed to a decline in demand, while the introduction of new insurance norms made purchases more expensive for consumers.

Advanced BS-VI norms, now mandatory from 1st April 2020, is viewed as a watershed event. Citi analysts estimate the impact on vehicle prices to be between 5-15%. The new norms may also result in an increase in overall imports and R&D costs for automotive parts manufacturers.

Under the revised GST guidelines, 70% of auto components are now taxed at 18% and the remaining at 28%. Given the high level of employment generated by the industry, Citi analysts expect more auto components to migrate to the 18% tax slab. There’s scope for simplification as well, for instance - tyres are taxed at 28% while tubes, when sold alone, are taxed at 18%.

Global Demand

Global auto demand has also hit a soft patch. Exports to the US (~23% of Indian auto exports) have slowed owing to a delayed planting season, trade conflicts and moderating truck sales growth. European sales (~34% of Indian auto exports) remains weak following lower agri demand, Brexit and an anti-diesel trend.

Exports - Auto Component Industry: FY18

Source: ACMA. Note: Does not include tyres and batteries

Citi analysts expect to see a growth spurt in 2HFY20 for B2C companies with a pick-up in replacement sales for passenger vehicles and 2W tyre segments, supported by subdued raw material costs. However, for B2B companies (selling to OEMs), diversification and a change in sentiment remains key.

Nifty Auto Index has lost ~25% YoY with over half the decline incurred in the current calendar year. While the weightage of the auto sector in Nifty 50 stands at ~6%, the average exposure of Large Cap funds to auto-related companies has fallen by a quarter since the start of the calendar year.

1 Year Performance Comparison of NSE Sector Indices (as on 31st May 2019)

Source: NSE

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